Statements by Markus Flik

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Annual Press Conference on March 31, 2009 in Stuttgart
Statements by Markus Flik,
CEO of Behr GmbH & Co. KG
Ladies and Gentlemen:
I am happy to welcome you most warmly today to our Annual Press
Conference.
Let me begin by announcing my core messages:
 For 2008, we posted a heavy loss. Behr is in a difficult economic
situation.
 We have introduced timely and consistent countermeasures to master
the crisis, but it is a course that also demands heavy cuts.
 Our globalization strategy is successful. In spite of the crisis, we are
cautiously expanding our activities in Mexico, India and China.
 Our technology position is still strong, especially on account of the
contributions we are making towards reducing CO2 emissions.
 2009 will be a very hard year for us, and we expect our earnings
situation to deteriorate even further.
Situation in the industry
2008 was an extremely turbulent year for the auto industry. During the first six
months, we had to contend with the consequences of production overloads in
our plants and worked intensively on expanding our capacities. Towards the
end of the year, our customers’ production volumes were in free fall, plunging
even more dramatically even than in the fall of 1992.
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In the case of light vehicles (i.e. passenger cars and SUVs/pick-ups),
production in North America fell in the first half of 2008 by 12 percent
compared to the previous year. In the second half of 2008, the pace of the
decline quickened to 21 percent.
In Europe, the downturn was even more dramatic. In the first six months,
production rose by 5 percent only to stagnate in the third quarter and finally
plummet by 24 percent in the fourth quarter.
Since the third quarter of 2008, we are also experiencing a massive global
downturn in the heavy trucks industry. Due to the financial crisis, freight
forwarders are unable to fund large purchases, a situation which is additionally
burdened by the low demand for freight transport.
In the USA, commercial vehicle production rose slightly by 14 percent in the
first half of 2008, with numbers falling by 32 percent in the second half. The
situation was even more volatile in Europe, where truck production in the first
six months was 66 percent above the previous year’s level, only to drop in the
fourth quarter by an incredible 62 percent.
In the first quarter of 2009, there is no sign of any of the markets improving, on
the contrary: Since, in the third and fourth quarters, vehicle stocks had, in
some cases, been built up, these now have to be reduced again by further
throttling production.
This crisis will be deeper and longer than any other crisis since the War. Its
origins are both cyclical as well as structural.
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Sales
In the past fiscal year, sales of the Behr Group amounted to 3.33 billion
euros, which is 1.5 percent below the previous year’s figure.
In spite of the market downturn, we succeeded in Europe in increasing sales
by 2.2 percent and were thus able to win additional market share. The
dramatic market slump in North America also affected Behr. Sales in this
region dropped by 11.9 percent or, when adjusted for currency effects, by
around 6 percent. The decline of 5.9 percent in Asia has its prime origin in
India. In China, on the other hand, we were able to further expand our
position.
The drop in sales in the Air Conditioning Product Division of 8.1 percent to
1.28 billion euros resulted from the weak market in North America. With our
engine cooling products, however, we were able to expand our position and
increase sales in the declining market by 1.3 percent.
In the Service division, consumer reticence caused sales to drop by 2.2
percent to 262 million euros.
The global investment surge in the rail vehicles sector boosted sales in the
industrial business segment by 26 to 189 million euros.
Results situation
The market downturn in 2008 led to a massive slump in earnings. As a result
the Group’s EBIT dropped from 85 million euros to -6 million euros. Following
profits of 40 million euros in the previous year, earnings before taxes in the
year under review showed a loss of 70 million euros.
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The prime contributing factors, here, are:
1. The ongoing very difficult market situation in the USA
2. The market downturn in Europe in the fourth quarter of 2008
3. Substantial burdens caused by problems at suppliers whom we had to
support financially
4. Considerable additional costs incurred as a result of a labor dispute in
connection with the partial closure of our plant in Barcelona.
The operating cash flow fell by 13.7 percent to 145 million euros. This
reduction, however, is much smaller than the fall-off in earnings. This is a
result of further improvements in the level of capital tied up in working capital
which we achieved in 2008.
In 2008, the Behr Group invested 185 million euros, which is 9.5 percent
more than in the previous year. Investments focused on expanding capacities
to accommodate the high number of order call-offs from our customers in the
first half of the year. Most of this capital, i.e. 137 million euros, was invested in
Europe.
R&D expenditure in the Group rose by 5.4 percent to 254 million euros.
Again, expenditure mainly occurred in the first three quarters of 2008, while it
was significantly reduced in the fourth quarter.
At year-end there were 18,812 employees in the Behr Group, 3.3 percent
fewer than in the previous year. Taking into account the leased staff, the
reduction in personnel, which mainly took place in Germany, Spain, the USA
and South Africa, amounted to 1,300 employees, or 6.3 percent.
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The way out of the crisis
Ladies and Gentlemen,
In 2008 Behr had to endure a heavy loss. But we have taken the necessary
steps to master the crisis:
Behr America succeeded in 2008 in fully eliminating the operational problems
stemming from 2007 and clearly exceeded its productivity and quality targets.
Nevertheless, the ongoing very difficult market situation has forced our US
company to implement significant cuts. We had to shed over 400 staff in the
USA which is 16 percent of the workforce. This was partly a result of
concentrating assembly of HVAC modules in Dayton which involved the partial
closure of our location in Fort Worth. To economize on costs we also had to
relocate production of condensers and evaporators to Mexico. Furthermore,
over the next two years approximately one third of the development work
currently performed by Behr America will be taken over by Behr India.
Since last fall we have adjusted to the market downturn in Europe by
implementing timely and consistent measures. These included reducing
leased and temporary staff levels, reducing working time accounts, utilizing
natural employee turnover and early retirement incentives, introducing a
recruitment freeze, as well as reducing working hours and remuneration in the
plants. The overall effect of these measures was that between the end of
August and the end of February, we reduced personnel numbers by around
1,600 in Europe. In spite of declining production, this enabled us to
additionally maintain productivity in the European plants at a good level.
Wolfgang Schäfer will have more to report on the situation in Germany later.
By consistently optimizing our ordering cycles and internal commodity flows,
we were able to significantly reduce inventories during the year as a whole by
41 million euros to 308 million euros, or 9.2 percent of sales, without
compromising our excellent delivery reliability.
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In 2009, we will substantially reduce investments and focus on the essentials
by making optimum use of our global capacities.
At the beginning of 2008, we launched our Group-wide profit-enhancing
initiative Project 2010. This project encompasses production, development,
administration and sales, and thus all stages of the value-added chain. The
project was exceptionally successful right from the start and has even
overfulfilled the targets set for 2008. Over 2,000 measures were implemented
by our employees over the past year. We will continue to maintain this
dynamic course during the current year as well.
In the industrial business sector, we achieved a turnaround. After posting a
loss in 2007, Behr Industry achieved positive results in the year under review.
The company develops and manufactures engine cooling and air conditioning
systems for rail vehicles, ships and buses, as well as for construction and
agricultural machinery. New processes and structures, the expansion of
production in Eastern Germany coupled with investments in enhancing staff
skills have all contributed to bringing Behr Industry back to profitability and on
course for further growth.
There is nothing to gloss over: Behr is in a difficult economic situation. But I
am very proud of the way our managers and staff are pulling their weight in
these difficult times and helping to push through these challenging measures.
We can count on the fighting spirit of a team committed to Behr’s success.
Ladies and Gentlemen,
The global market downturn is compounded by a more fundamental problem,
namely a structural one. The auto industry is about to undergo a radical
change. In the long run, vehicle production figures will not reach the level
attained at the end of 2007/beginning of 2008. There is a clear trend towards
smaller vehicles and smaller engines. A further burdening factor is the
demand for lower vehicle CO2 emissions. As a result, the entire industry will
have to adjust its structures accordingly.
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This equally applies to Behr. We have to cut our structural costs in
development and administration in Stuttgart by 30 million euros. This also
involves shedding up to 300 jobs and negotiating further reductions in labor
costs. We informed you about this on February 10.
We nevertheless intend to maintain our performance capability and are thus
flanking these economy measures with enhancements to our organizational
structure. We will expedite processes and workflows and reduce interfaces
so as to leverage efficiency in development and administration. These actions
will be implemented shortly.
Success in the growth markets
We also have some good news to report. Our globalization strategy is proving
successful. In China, for instance, we were able to increase sales by 8.8
percent and improve earnings. Our new company in Mexico was already
operating profitably last year. We are therefore investing cautiously in the
reinforcement of our activities in Mexico, India and China.
The expansion of facilities at our plant in Mexico which opened at the end of
2006 is making good headway. We are further extending capacities for the
production of heat exchangers. Behr Mexico now employs some 350 staff.
Since 2000, Behr India has been performing engineering services for other
Behr companies. Due to the growing demand within the Behr organization,
especially from the USA and Stuttgart, Behr Engineering Services has now
been transformed into an independent business unit. By the end of 2009, the
current team of around 80 will be increased to some 150 staff.
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In future Behr will be producing HVAC components and engine cooling
systems for the China National Heavy Duty Truck Corporation (CNHTC), one
of the biggest heavy truck manufacturers in China. The long-term cooperation
agreement between CNHTC and Behr also envisages the construction of a
new plant in the vicinity of Jinan. CNHTC will be responsible for building the
infrastructure and the plant. Behr, on the other hand, will invest around 4
million euros in the production facilities and will be in charge of training the
workforce of around 120 employees. The plant is slated to start production at
the end of 2009. The sales target for 2010 is to achieve 30 million euros.
Further potential for growth lies in the Euro 4 exhaust emissions standard
expected to be implemented in China in 2012.
Strong technology position
Our engine cooling technology contributes towards reducing fuel consumption
and emissions. Our focus in the air conditioning sector is on enhancing
comfort and boosting efficiency. We have a particularly strong market position
in the premium segment, and in the large modules and systems sector.
Here are some examples of our current innovations:
Indirect charge air cooling
In 2008, BMW’s turbo V8 gasoline engine, featuring our indirect charge air
cooling system, went into series production. As opposed to the air-cooled
charge air cooler, the indirect charge air cooler can be mounted on the engine
and is cooled by a separate low-temperature coolant circuit. Not only does this
save package space, the short ducting between charge air and cooler also
reduces pressure drop, thus boosting the resulting charge air pressure. At
given power levels this enables reductions in fuel consumption and CO2
emissions.
In its new Euro 5 engines, MAN is now employing a two-stage turbocharging
system with two-stage indirect charge air cooling. This obviates the need for
exhaust gas aftertreatment using urea.
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Both indirect charge air coolers are a new Behr innovation. They offer high
power densities and are designed to meet the extremely high temperature and
pressure requirements of this application. These innovative charge air coolers
are manufactured at our plant in Mühlacker, Germany.
Battery cooling
This summer Mercedes-Benz will be the first manufacturer to launch the
production of a hybrid vehicle that uses a lithium-ion battery–the S400 Blue
Hybrid. This battery is superior to the nickel metal hydride batteries currently
still in use. However, to ensure optimum performance and service life, the
lithium-ion battery has to be operated within a narrow temperature range of
around 10 - 40°C. As such, special cooling requirements have to be met.
In collaboration with Daimler, Behr has developed the cooling technology for
the lithium-ion battery. It is cooled by the vehicle’s air conditioning circuit and,
similar to a rear HVAC module, is directly integrated into the refrigerant circuit.
Cooling is achieved using a cooling plate made of aluminum which contains
channels in which the refrigerant evaporates. The plate is in thermal contact
with the cells of the lithium-ion battery.
Air conditioning comfort
Our comfort vent went into series production in the new 7 Series BMW. For
the first time ever, passengers can individually select not only the direction but
also the type of airflow that best suits their needs:
 Diffused ventilation: The airflow is fanned out. The air conditioning
system runs absolutely draft-free.
 Spot flow: The airflow is bundled and can be focused on a specific
point.
 Maximum airflow: The air is partly spread out and partly bundled.
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The superior level of individual comfort provided by Behr’s four-zone
automatic climate control system in the new 7 Series BMW sets new
standards. A premium consideration jointly shared by Behr and BMW was
ensuring optimum air quality. Furthermore, we have markedly improved the
system’s acoustics and cooling power.
Systems competence
In the new Porsche Panamera we can demonstrate the entire spectrum of our
thermal management systems competence, for this vehicle features the
following Behr development services and products:
 Refrigerant and heating circuit including production of the lines
 HVAC module: The world’s first four-zone air conditioning system with
temperature and air mass control housed in a single unit
 Cabin air ducting including production of the air guiding elements for
the air distribution function
 A/C control system and control head from BHTC, our joint venture with
Hella
 Integration of the entire cockpit module in close collaboration with
Dräxlmaier who performs the assembly work
 Cooling module for engine and powertrain
 Integration and assembly of the frontend module by HBPO, our joint
venture with Hella and Plastic Omnium
This project illustrates the creativeness and innovative drive of our company
and employees. Through intensive collaboration with Porsche, we were able
to consistently implement our systems concept.
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The new E-Class, too, features examples of Behr’s air conditioning know-how.
In close cooperation with Daimler, we succeeded in incorporating in the E-
Class key climate comfort elements that passengers had previously only been
able to experience in the S-Class:
 Different modes or styles: normal, diffused and spot flow
 Individually adjustable temperature for the rear compartment
 Clear and simple operation; the control head is made by BHTC.
According to the auto magazine “Auto Motor und Sport”, “The new air
conditioning system is probably the best you can currently get in the upper
mid-size range”.
Outlook
Ladies and Gentlemen,
For 2009 we anticipate a drop of more than 20 percent in car production in
Europe and an even sharper decline, 50 percent, in the heavy trucks market.
In the USA, the market is currently deteriorating at a much faster rate than
anticipated at the end of 2008. Current forecasts predict less than 10 million
light vehicles as compared with 12.9 million in 2008 and 15 million in 2007.
Against this background, we anticipate for the Behr Group a reduction in
sales in 2009 of 15 to 20 percent. Without the numerous production startups
we are implementing, this drop would be even sharper.
So, in spite of the progress we are making with our cost saving measures, we
expect to post an even higher loss in 2009. We are rigorously pursuing our
course of implementing the aforementioned countermeasures, but some of
these will not take effect until 2010.
Thank you.